BackMint Annual Banking Conclave | The changing landscape of Indian banking
At Mint's 10th Annual Banking Conclave, India's top bankers discuss issues confronting the sector such as competition, growth and asset quality
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At Mint’s 10th Annual Banking Conclave on 23 January, India’s top bankers got together to discuss issues confronting the sector such as competition, growth and asset quality. SBI chairman Arundhati Bhattacharya, ICICI managing director (MD) and chief executive officer (CEO) Chanda Kochhar, Punjab National Bank MD and CEO Usha Ananthasubramanian, HDFC Bank MD Aditya Puri, Axis Bank MD and CEO Shikha Sharma, and Citibank India CEO Pramit Jhaveri took part in the discussion on ‘Indian Banking: The new landscape moderated by Tamal Bandyopadhyay. Edited excerpts:
On increasing competition and the changing banking landscape, with the emergence of differentiated banks:
Puri: Competition will come, there will be a change in the financial landscape...congruence of information, technology, mobility, analytics and computing (means) that there will be a change in the business model. All of us are pretty much prepared today to offer every conceivable financial service to the customer in any form he wants. He wants it manually, he wants it on the phone, computer—he can have a complete set of services which include what wallets would do, what payment banks would do. If he comes to our bank say on our mobile phone, he can buy mutual funds, buy insurance, he can download an app like a wallet... he can get his assets report. We are pretty much ahead of the curve. We are not complacent.
On foreign banks in India:
Jhaveri: If you look back in time in the last 25 years, this industry has been no stranger to competition, this industry has been no stranger to disruption. In the last two decades, we have seen this happen multiple times; this industry is not afraid of competition... Since the financial crisis, the global industry has undergone significant change—some of it is because of the crisis, the new regulatory regime. As far as we are concerned there are natural advantages which we bring to the table—there is a global footprint, global reach... If you combine that with our strength in India from the technology point of view, disruption point of view, we are very pleased with what we were able to do both on the corporate and consumer side. If you look at the number of milestones which have taken place... things have only got better over time.
On the limited growth of foreign banks in India:
Jhaveri: At the end of the day, you have to look at the presence you can have in a particular market place around the constraints we operate. At the end of the day, we have a limited branch footprint. When you look at innovations, plenty of which we have had on the consumer side, institution side, I will not bore you with that. You look at the market share (of foreign banks) with a very small physical footprint in the country—the credit card business, wealth management business; I will not bore you with numbers. Our market share is significant...
On the emerging competitive scenario:
Ananthasubramanian: If you see Indian banking, every public sector bank remained a regional bank. Post-liberalization, with branch expansion, competition started. It will continue to be on, irrespective of the players coming in... Given the competition, I will say if you lay a cake on this table and everybody takes a piece, the cake will continue to grow. That is the scope of banking. But Indian banks have realized that you have to be on your toes and take competition through the route of technology. The established banks in the country can take on competition and still remain in harmony.
Sharma: We will see new forms of competition coming. We have also invested a lot in terms of technology through a range of products to our customers and making sure we are able to differentiate in terms of service. We are pretty well prepared and any functionality customer is looking for, we have a digital footprint around that. We will not be embarrassed. We are excited by some of the competition. In India, today there is still a huge market out there...
Jayakumar: Most significant challenge which we face is to complete the transformation exercise. One is to strengthen our basic processes, second is to get digital, analytical, etc., third is significant… of people. That is a significant objective at this point of time. That said, we have a bunch of young people who are pushing forward, my perspective of the whole thing is get ourselves fit, get these changes done.
Kochhar: I don’t think many of us will be able to say different things because already a lot has been spoken. The Indian banking industry has always faced competition because we have certain areas of business that we are following; sometimes it is interest rates and currently technology is disruptive again. New entrants are coming in the field. A lot of changes are happening across...the financial spectrum. A lot of what these small entities can do, banks can also do; banks have a larger relationship with the customers. Second is, competition expands the market, it brings more and more people to the formal lending market.
Bhattacharya: We have been alive for the past 111 years... We have in fact used competition at every level to sort of lift up, and in the last 10 years actually in deposits we have gained 300 basis points market share, from 15.3% we are up to 18.3% and in advances we have gained 60 basis points. We have a customer base of 350 million and on a daily basis we were opening 50,000-70,000 accounts...after demonetisation, we alone opened 89 lakh accounts, that’s the kind of the reach we have. Demonetisation gave us a boost in ensuring our BC (business correspondent) channels were really active, we have a huge amount of collaboration. We have 235,00 PoS (point of sales) machines which are paying out cash; competition makes us tougher, wiser and better.
On how easy or difficult is it to change public sector banks:
Jayakumar: One is to look at a parallel transformational exercise SBI has done. I have spoken to their CEOs, past and present. As far as changes are concerned, there will be some resistance; once plans start showing results, resistance starts coming off... I think it has lot to do with the way we communicate, but accept that there will be some pushback and you have to pick the right battles.
On impact of demonetisation on monetary transmission:
Bhattacharya: In Indian banks, 97% of resources come from deposits. Therefore, if you are not cutting rates of deposit, you will not be able to pass on that benefit (of lower rates). You cut rates of deposits when they are plentiful in the system. It is a simple law of demand and supply. All the banks are saying that if RBI (Reserve Bank of India) cuts rates and keeps liquidity tight, there is no way transmission can occur. Till March this year, liquidity was very very tight. However, because of the huge deposits that have come into the system, we are able to reduce the cost of deposits and automatically that will flow into cost of borrowing. A lot of us are held back, we are not sure how much of those resources will stay with us. If these resources prove to be stable, which we will get to know in the next 2-3 months, you will see deposit rates further falling... you will see impact on borrower side.
On deposits, we are quite conservative; on loan side not so. The reason is that is we want to give a fillip to credit growth, with so much of deposits hanging on our hands if I don’t give a fillip to credit growth I will not be able to make the best of the situation. On deposits side we are still being conservative.
Puri: At the moment we have a tremendous amount of supply. If money is tight and we are not dependent on our borrowers’ funds, then unless the supply of money exceeds demand, rates will not come down...
Sharma: For a quarter I will expect rates to remain low depending on when restrictions on withdrawls are removed. We will go quarter by quarter.
Ananthasubramanian: This is a kind of one-off event that has happened in the country’s history. This kind of accretion we have never seen. Bank deposits have surged... Maybe, I am guessing, 40% will stay with us...For a short while, it will be an advantage that will flow to the customers.
Kochhar: We should recognize this was a one of its kind event. Even in the first six months of the year, total accretion to the banking system was Rs5.4 trillion but just in these two months, accretion was another Rs6 trillion. In that sense liquidity has come into the banking system and therefore reduces the lending rate. Some part of it will go back to the system, and some should go back to the system. Impact on interest rates is (that) we will definitely remain in a soft interest rate regime.
Ananthasubramanian: In the post-demonetisation era, what has happened is, specially women I speak of, that money has moved from masala dabbas to the banking sector. People have opened accounts, money has moved into the system, that is one. It is very important to educate (customers) and plan strategy with them, which is happening. People are being educated about various services like SIPs (systematic investment plans)...
Jhaveri: When you look at credit offtake and investment, we tend to focus just on the private sector. When you look at different offtakes, we talked about consumers, households. I think there is no problem with credit offtake. As far as private corporate sector is concerned, working capital needs to increase, there are certain clear indications that working capital cycle is increasing. Hopefully, that will be followed over time as some will start increasing capacity utilization. It has been a tough period in terms of credit offtake...
Kochhar: When you look at credit growth, let’s also look at two things in terms of how the Indian economy is structurally changing. One is supply of credit itself, if you look at the last one year, there was a Rs4 trillion increase in the banking credit; there is an equal amount of issuance of bonds and commercial paper—we tend to ignore that. Second is that structure of economy is also changing...It’s not just about working capital increase of a particular company, how it is translating into a lot of start-ups that are then increasing multiplier impact on the economy...
Sharma: On retail side, as everybody has said, growth has been reasonably heavy, and some products are more interest rate-sensitive—for instance mortgages, very interest rate-sensitive. The fact that interest rates have come off, helps the mortgage market; may be right now people are waiting (in the hope) that home prices will correct next quarter or so; home loans should see annual growth from here, auto loans and retail loans have done well... We expect working capital growth to pick up. As far as private investment is concerned, we need to wait for the consumption cycle to play out. Credit growth of double digits is a good number.
Bhattacharya: Investments happen when your existing capacity starts getting utilized to around 80-85%. Now for that to happen, demand has to go up. At this point of time, two things will make demand go up. Because demand in this country exists, it’s a question of people actually executing on that demand. One is business confidence goes up and two ease of doing business goes up. Both of these two are very important. Government has in its hands one very potent trigger that can actually be used for doing both the things, —that is the budget. In the budget, it has been our recommendation—boosting both consumption and investment. Now if this is done in proper manner I do believe it can act as a very good trigger. This along with resolution of large stressed assets on which we are working on very, very assiduously. These two things can actually bring back the demand.
On pain caused to the informal economy by demonetisation, impact on demand:
Puri: I think in most of the organized sector and sectors that moved from the unorganized to the organized sector, it (demand) has pretty much returned. I talked to Bharat Puri at Pidilite, he is seeing a return to whatever was there on 8 November; I talked to Harsh Mariwala (Marico Ltd chairman), he is also surprised with the ‘V’ recovery; then I see for ourselves, we are back to 8 November.
Sharma: I think what Aditya said is that in the formal sector or which has moved to the formal sector, recovery has surprised all by being V-shaped but the segments which are cash segment parts of agriculture, there I think the recovery is slower.
Puri: The second part is that the parts of the economy that are moving from informal to formal sector also will create demand for assets. What you were financing previously though cash will now have to be financed with the banks.
On banks’ asset quality. Is the worst over?
Bhattacharya: One must understand something—that non-performing assets (NPAs) are not a one-time occurrence. NPAs are an occurrence that happen throughout the life of any institution, not only for banks, even for businesses. Even businesses have to write off some amount of receivables. What happened in this case was that a large number of units, especially in infrastructure, went bad because investments happened in one short and small space of time and many of the investments could not result in the ultimate assets getting created and cash flows getting established. This happened on account of many, many things that happened in the economy in a particular space of time. Having said that, I must say that whatever the government has done for enabling better resolution is going to have its effect, it may not have yet started...Yes, the worst is over...These are evolving times. Impact of demonetisation on SMEs (small and medium enterprises), that will come with a lag of about a quarter. It takes time to trickle down into the banks book. By March 2017, we should look at things getting better.
Kochhar: When we talk of NPAs we generally just get stuck with recognition and numbers. Important point is recognition, resolution and provision. Now, if you look at banks in India, recognition-wise there are RBI rules, not just that. RBI followed earlier recognition through the AQR (asset quality review), we have also been doing that.
As far as provisions are concerned, some banks have been proactive to actually provide more to the extent possible. On recognition and provisioning, a lot of work has happened.
What is very important is that...we give equal amount of focus on resolution...
Jayakumar: I am not focused on gross NPA ratio and that number for us has been coming down. Second, there are risks in the mid-market segment. Three, one hopes some of the larger accounts get resolved; that will provide us with some upgrades that will pay for the litigation. Overall I think we will be within the forecast that is provided.
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